Electronic trading systems have gained widespread acceptance over recent years for trading a wide variety of tradable products including financial instruments, and in many financial markets are the preferred mode of trading financial instruments such as equities products or foreign exchange products. In the foreign exchange (FX) market, anonymous trading systems have become the most common method of trading FX spot. Two main systems have gained acceptance, Reuters Dealing 2000 provided by Reuters plc and EBS provided by EBS Dealing Resources Inc. The Reuters product is described in EP-A-399850 and the EBS product is described in WO 93/15467. These systems are anonymous in that traders submit bids and offers into the system that are displayed to other traders without any indication of who has submitted the quote. A trader who wishes to deal a quote does not know the identity of the party with whom he is dealing until the deal has been completed. To avoid trades being executed with parties the traders' banks consider uncreditworthy, each trading floor trading on the systems enters credit limits for each possible counterparty on the system. These credit limits set a maximum value for trades with each possible counterparty and reflect the institution's assessment of their exposure risk by trading with those counterparties. If an institution does not wish to trade with a given trading floor it will set the credit limit for that trading floor to zero.
In both the Reuters and EBS systems as implemented, a first credit check is made before a bid or offer is displayed to traders on a trading floor. If the owner of that quote has no credit with that trading floor, or vice versa, there is no possibility of a deal between the two parties and the quote is filtered out and not displayed to the trading floor. This check is based on the existence or non-existence of credit and not the actual amount of credit required. Once a deal has been negotiated, a further credit check is performed to ensure that each party has sufficient actual remaining credit for the whole amount of the deal. Where insufficient credit remains on one side or the other, the value of the deal may be reduced by the system to reflect the actual available credit.
The Reuters and EBS systems have been very successful in the major currency pairs dealt on the FX markets. However, the systems are only used by, and intended only for use by, major financial institutions. The nature of the systems, and the currency pairs dealt, is such that it is unattractive for large institutions to trade with smaller or less creditworthy institutions, or even large corporate customers. For the major currency pairs such as USD:EUR or GBP:USD this does not hinder operation of the systems as there is sufficient liquidity in the market for the market to operate properly.
However, the smaller players are effectively excluded from trading and seeing many of the best prices. For the less active currency pairs, it can even prevent sufficient liquidity being achieved in the market for that currency pair to make trading on the anonymous system a viable proposition.